Regulatory: A new paradigm in FTC regulation

This is the first in a series of three articles about Federal Trade Commission and state attorney general regulatory and enforcement trends

Corporate counsel looking to keep abreast of Federal Trade Commission (FTC) requirements and regulations need to play close attention to the consent orders coming from the commission. Although historically FTC case law, statutory provisions, trade regulation rules and guides provided the primary source of FTC jurisprudence, the agency is increasingly using consent order provisions to establish industry guidance and standards on a variety of advertising-related issues. Although technically these consent order provisions are binding only for the entities that sign them, they are often clearly designed to send a message to the entire industry regarding FTC expectations.

Three clear examples of this trend involve more stringent standards set forth in consent orders dealing with substantiation of health-related claims for foods and dietary supplements, increasingly rigorous disclosure requirements and a higher threshold for “up to” claims.

In the key area of substantiation requirements, the FTC has historically followed a flexible approach in which the level of substantiation required is determined on a case-by-case basis based on a variety of factors, including the type of product, the type of claim, the benefits if the claim is true, the consequences if the claim is false and the level of substantiation that experts in the field would agree is adequate. For health and safety claims, the FTC has traditionally required “competent and reliable scientific evidence”; however, even this standard has been flexibly defined to mean “tests, studies or other research based on the expertise of professionals in the field that have been objectively conducted and evaluated by qualified people using procedures that give accurate and reliable results.”

Beginning in June 2010, through a series of consent decrees announced in rapid succession against Iovate Health Sciences, Nestle Healthcare Nutrition and Dannon, the FTC unveiled a new three-tiered approach for substantiating health and safety claims for foods and dietary supplements. Each one of these orders required prior Food and Drug Administration approval for disease treatment and prevention claims; two double-blind, placebo-controlled clinical studies for certain health-related and weight loss claims; and the more flexible “competent and reliable” scientific evidence standard only for more general health and product efficacy claims. The FTC maintained that these standards were not “new” but simply represented a clearer articulation of what experts in the field deemed necessary to support the health claims at issue.

More recently, the FTC expanded the scope of its clinical study requirements beyond foods and dietary supplements to apply to footwear and exercise products. Consent orders that the agency entered into with Sketchers, Reebok and the manufacturers of the Ab Circle Pro required the advertisers to substantiate any future weight loss or fitness claims with one or two double-blind, placebo-controlled clinical studies.

The issue of whether the FTC can require double-blind, placebo-controlled clinical studies to substantiate health-related claims has been the subject of heated litigation between the FTC and POM Wonderful, stemming from that challenges the FTC mounted against certain health claims POM made for its pomegranate juice. In round one of the battle, an administrative law judge (ALJ) ruled that the FTC could not require double-blind, placebo-controlled clinical trials for health-related claims being made for a food product where the product was not being promoted as a substitute for medical treatment. (The ALJ did rule that POM had not substantiated its claims).

Last month, however, the commission reversed the ALJ’s decision and ruled that a double-blind clinical study should be required to support disease prevention and treatment claims for a food product, such as those that POM allegedly made. While the litigation surrounding this issue makes for interesting reading, what is significant from a brand perspective is that without any statutory changes or judicial rulings the FTC has been insisting on this level of substantiation for these types of claims in virtually every enforcement action it has brought in the last several years. Those who have been closely following the evolution of these consent decrees could see the writing on the wall for quite some time.

A second area in which the FTC has set new standards is that of disclosures. As many readers may know, the FTC is currently in the process of revising its Dot Com Disclosure guidelines, and recently held an industry-wide workshop to assist in that process. While the industry anxiously awaits publication of those revised guides, a recent enforcement action involving a company called Green Millionaire likely provides some guidance of what is to come and insight into what the FTC is likely to consider adequate disclosure for online offers.

In that case, which involved online sales of an electronic magazine on a continuous subscription basis, the FTC inserted two disclosure requirements in the consent order that brands should take particular note of. The first is a requirement that certain key terms of the offer, and only those offer terms be stated in a distinct paragraph. This is indicative of the FTC’s preferred layering approach to disclosures, in which the most salient information is to be presented in a standalone paragraph unencumbered by other extraneous copy or denser text that will make it more difficult to read.

Secondly, the consent order requires that the consumer check a box that appears immediately below this disclosure paragraph in order to indicate affirmative consent to the offer. Again, while there is currently no legal requirement for such an explicit disclosure or consent mechanism, the FTC has publicly directed marketers to read these provisions of the consent order for guidance as to what the commission’s views are respecting “clear and conspicuous” disclosure.

The third area in which the FTC has provided guidance by consent order is that of “up to claims.” Historically, both the FTC and the National Advertising Division of the Better Business Bureau have generally held that an advertiser can make “up to” savings or similar claims as long as 10 percent of consumers would achieve the maximum advertised savings. The FTC unveiled a more stringent policy regarding “up to” savings claims in connection with consent orders issued against five companies that made “up to” energy savings claims for their replacement window products. These orders prohibit the companies from making “up to” energy savings claims in the future unless “all or almost all” consumers are likely to achieve the maximum savings promised.

The FTC followed the announcement of these consent orders with a report based on copy testing it had conducted on the challenged ads supporting its view that consumers are likely to interpret such claims to mean that all or almost all consumers are likely to achieve the maximum results advertised. Marketers making “up to” claims in the future should be mindful of this shift in the FTC’s position.

As the FTC continues to aggressively pursue enforcement actions, corporate counsel should routinely monitor its consent orders to obtain important insight into how the agency is likely to view their own company’s marketing activities.